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Credit Score
Your credit score is one of the most important factors in determining how your finances will develop in the linked world of today. This three-digit number is a financial fingerprint, giving lenders, renters, and even some employers a brief overview of your creditworthiness. It represents your borrowing and repayment history.
What is a credit score?
It's in numerical terms through the credit score that depicts the extent to which you have managed the various types of credit products, including overdrafts, mortgages, credit cards, auto loans, and personal loans. For the banks and financial institutions as well as other creditors, this score is often known as the credit score and serves as the critical determinant for loan eligibility. Learn more about how credit scores impact personal loan eligibility. Generally speaking, credit scores range between 300 and 900. A score of 760 or more is considered the best for loan approval thus, the higher your score is, the greater your potential opportunity to get new credit.
Importance of credit score
A credit score is significant because it benefits the borrower and the lender in the following ways:
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Evaluation of a person's creditworthiness can be done using a credit score.
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Generally, the better the management of one's finances, the higher the credit scores.
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Banks tend to shun lending to individuals with poor credit scores; after all, a poor credit score does indicate an untrustworthy borrower.
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Poor credit score may result in higher rates of interest or loan refusal.
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Other factors are taken into consideration even though the decision of giving a loan is primarily based on a credit score. Better loan terms, and reduced interest rates are found to be frequently associated with higher credit scores.
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The outcome could be higher interest rates on loans with lower credit scores.
How does the credit score work?
- Lenders and issuers of credit cards: Banks and NBFCs use your credit score in order to decide whether you are able to repay the loan back on time. This makes them take the right decisions about lending you credit.
- Landlords: To ensure you will always be able to pay rent on time, landlords sometimes look up your credit score. In India, though prevalent all over the world, this culture is still in its nascent stages. But since this trend is likely to persist, maintaining a high credit score becomes essential.
Steps to check credit score
Here is an online way through which you can easily check your credit score:
Step 1: Visit the official website
Step 2: "Check your credit score" select this option.
Step 3: Enter your mobile number, email address, and full name (as per PAN card).
Step 4: Click on the 'view credit score' button.
Step 5: After this you can easily check your credit score for free.
Benefits of checking your credit score regularly
Following are some benefits of checking your credit score periodically:
- Track your financial behavior: The ability to keep an eye on the score can make you better understand the financial behavior and its effect on your creditworthiness. This helps you to make all the required changes that help increase your score.
- Verify accuracy: Sometimes, errors or inaccuracies in your credit report may cause a lower score. Regular checks help you to detect errors so you can easily report the credit bureau and correct them.
- Know more about better offers: A credit score allows you to recognise better credit card or loan deals. If your credit score is higher, then you become a more loyal customer for lenders. That could mean better conditions and lower interest rates.
Credit Score Range
| Range | Rating | Implication |
|---|---|---|
| 800 and above | Excellent | Low-risk customers who can more easily obtain a loan with favourable terms. |
| 750 to 799 | Very good | Good credit history and easy approval for the credit application. |
| 701 to 749 | Good | Good credit history and easy approval for the credit application. |
| 651 to 700 | Fair | Because of their high default risk, "subprime" borrowers have a hard time getting new credit. |
| 300 to 650 | Bad | If applying with this level, there is a high likelihood of credit refusal; concentrate on raising your credit score. |
How is the credit score calculated?
Your credit score depends on lots of things, all which are important and are used to calculate your credit score:
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Payment history:
Largely influenced is your history of making payments on or before due dates. In contrast to timely payments that can build up your score, some late payments, defaults or skipped invoices can bring your score low. -
Credit utilisation ratio:
It refers to the amount of credit that you use in relation to your entire credit limit. Experts suggest keeping your credit utilisation under 30% to keep your score healthy. -
Length of credit history:
The longer you have had credit accounts, the better your credit score will be. Applying for big loans, such as a mortgage, may be easier if you start early and maintain your accounts. -
Credit mix:
You should ideally have a mix of secured and unsecured credit. With experience in both forms of credit, you will be able to handle a wide variety of financial goods correctly. -
Hard enquiries:
A hard inquiry is when a lender checks your credit report when you apply for a new credit card or loan. One should limit new credit applications because too many enquiries within a short period of time will decrease your credit score.
How to improve credit score?
Just a few calculated actions are enough to improve your credit score:
- Avoid late payments: Always prevent a late payment by taking an advanced reminder or automate all of your payments so you ensure payments without failure.
- Verify for errors: Scan regularly in the credit report in the quest of any inconsistency errors if found, file an objection with the credit agency.
- Control credit utilisation: Never use more than 30% of the credit limit, this enhances your score by reducing your credit utilisation ratio.
- Limit credit inquiries: Your credit score may be affected if you apply for several loans or credit cards simultaneously. Be very judicious about where and when to apply.
- Keep older accounts open: Closing old credit accounts can hurt your credit score because this will reduce your credit history. It is better to keep them open to show a longer, more consistent credit history.
- Co-signed loans: Pay attention to the loans that you co-signed, while you are not the primary borrower, missing payments can negatively impact your credit score.
FAQs
What is a credit score?
A credit score is a three-digit figure representing your creditworthiness. It is calculated based on your credit history which includes payment history, credit utilisation and credit types.
What is a good credit score in India?
A good credit score usually ranges between 750 to 900. In case your credit score is above 750, then the credit history is excellent, and hence you can easily get a personal loan from banks & financial institutes.
What is a bad credit score?
This score below 600 is usually termed bad credit score, and the low score simply means that you have bad credit history, and you will not qualify to borrow loans or credit cards with easy terms and conditions of credit.
How do banks use credit scores?
Credit scores are used by banks to assess the risk factor attached to lending people. Good credit score make a customer’s chances of getting their loan accepted higher, and receiving a lower interest rate.
How long will it take to create a good credit score?
Having a good credit score takes a long time and builds after you stay punctual and make all your repayments on time. Hence, it is advised to start early and try to keep a good credit history.
What should I avoid doing when building my credit score?
One of the things that you should always avoid is to delay your payment as this can significantly reduce your credit score. Also, you should avoid exhausting your credit card’s full limit, and avoid making multiple credit inquiries.
Does paying utility bills or rent help my credit score?
Usually, bill payments and rents do not get reported in your credit report. If these get included, then you should avoid any late repayment and be on time so that you can build a higher credit score.
How can I monitor my credit score progress as I build it?
As a consumer you get to obtain one copy of your credit score and report for free, annually. Self-checking often is beneficial to ensure that you are able to detect anything wrong in your credit score.